Stocks could be entering a powerful, multi-year rally as hedge funds increase their exposure and retail investors move money off the sidelines, according to Tom Lee, head of research at Fundstrat.
In a new CNBC interview, Lee says say Investors had become cautious as tensions with Iran built up, but sentiment has since improved as downside geopolitical risks appear more limited.
“I think investors became very cautious in the run-up to the war. Many retail-owned stocks were affected, especially software stocks, and the Mag-7 was declining. Investors viewed the start of the war as a time to take risk off the table, which was very different from what we saw a year ago when investors bought into the terror flows.
Now I think the downside tail risks for the war have been removed. Hedge funds have been early and have increased risk, and we can confirm that from conversations with our clients. I think it is now the retail investors who are starting to take money off the sidelines and buy shares.”
Lee says improving earnings expectations and the relative strength of the U.S. economy could continue to attract global capital into equities.
“I would still have an overweight in the US. Because if you think about where innovation comes from, whether it’s technology, healthcare, financial services or fintech, it’s really US companies. There was an argument that the US price-to-earnings ratio should fall, but the war has exposed that the US share price should rise.
I think this is still going to be a very difficult year as we get a new Fed chairman, but if we get through that, the next 18 to 24 months could be one of the best we’ve ever seen.”
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